International Strategies and Knowledge Transfer Experiences of MNCs Taiwanese Subsidiaries Yi Ming Tseng, Tamkang University, Taipei, Taiwan ABSTRACT This research views the activities of international expansion on the part of MNCs as a process of knowledge transfer, and investigates the marketing knowledge transfer modes of MNC subsidiaries in Taiwan. Three modes of transfer are widely recognized in the literature: the global knowledge mode, host country knowledge development mode, and the standardized knowledge transfer mode. Results show that the types of global strategy adopted by MNCs clearly explain their selection of the knowledge transfer mode. Further, market similarity and strategic importance are also closely related to the selected transfer mode. INTRODUCTION Rapid changes in the nature of global competition have driven international managers and management researchers to search innovative ways to approach new challenges, tackle problems and answer questions as to how to manage complex multinational corporations most effectively. This has meant having to develop new theoretical perspectives with which to examine issues, such as those concerning the management of a set of foreign subsidiaries with diverse external environments and a wide range of internal skills and competencies. Researchers in organization theory (Levitt and March, 1988) as well as strategic management (Prahalad and Hamel, 1994) have identified organizational learning as one of the most important subjects for scholarly inquiry. A common thread among network theory (e.g., Ghoshal and Bartlett, 1990), organizational learning(e.g., Hedlund, 1986; 1994), and evolutionary theory (e.g.kogut and Zander, 1993) is their focus on the multi-relationships within MNCs, and the view that the multinational organization as a whole can greatly benefit from the transfer of resources and competencies within the firm. This research examines the central role played by global strategies as they relate to the process of knowledge transfer as MNCs expand into international markets. By focusing on one particular type of competency marketing knowledge, this research departs from past research that has traditionally focused on technology and other technical knowledge transfers. With only a few exceptions (Inkpen and Beamish, 1997), marketing knowledge has yet to receive proper conceptual and empirical attention as a competent source of competitive advantage that can be transferred inside MNCs. Indeed, the strategic significance of marketing knowledge to a firm s international competitiveness warrants closer scrutiny. The goals underlying the motivations for this study are twofold. The first core purpose of this research is to examine the relationship between global strategies and the modes of marketing knowledge transfer. Secondly, this study attempts to determine whether or not the impact of market factors explored before continue to exist when businesses enter into the knowledge transfer model. LITERATURE REVIEW Global Strategy One of the most important issues of an MNC s international business operations is its decision on its global strategy. Global strategy refers to the corporate competitive principles that are adopted when multinational corporations compete with global competitors and local firms in worldwide markets. It is comprised of the building and operating of the global value chain activities, allocating resources, and of establishing subsidiaries all over the world (Yip, 1995). Managers of MNCs must coordinate the implementation of their firms strategies among various business units in different parts of the world in different time zones, different cultural contexts and in different economic conditions. MNCs have the ability to exploit three sources of competitive advantages which are unavailable to domestic firms (Bartlett & Sumantra, 1989; Sumantra & Nohria, 1993; Yip, 1995): 1. Global efficiency: MNCs can maximize location efficiency by locating their facilities anywhere in the world that yields them the lowest production and or distribution costs or that best improves the quality of the services they offer their customers. Similarly, they can build factories to serve more than one country, and lower their costs by capturing economies of scope. MNCs pursuing global efficiency are regarded as following a global integrated strategy. 2. Multimarket flexibility: Unlike domestic firms which operate in the context of a single domestic environment, international firms Th e J o u r n a l o f Am e r ica n Aca d e m y o f Bu s in e ss, Ca m b r id ge * Vo l. 8 * Nu m. 2 * M a r ch 2 0 0 6 120
can respond to a change in one country by implementing a change in another. MNCs pursuing multimarket flexibility can be regarded as following a multidomestic response strategy. 3. Worldwide learning: An astute firm may learn from national differences and transfer the outcome of learning to its operations in other countries. MNCs pursuing worldwide learning can be regarded as following a home replication strategy Knowledge Transfer inside MNCs Knowledge transfer capability is one of the most important advantages of MNCs. Through the transfer and adaptation of knowledge, subsidiaries of MNCs build and develop their competitiveness over local firms. Knowledge transfers inside MNCs are also related to theories of organizational learning (Tienessan et al., 1997), that is, subsidiaries become global nodes by learning effectively and systematically from their parents. Basically, subsidiaries can establish their knowledge system in two ways. As for the first and the most frequently employed, knowledge is directly transferred from the parent company. In this way, the knowledge transferred from the parent can be classified into two categories: knowledge which is globally developed and distributed the global subsidiaries, and that which is developed from the parent s home market, but may not be suited to other host country markets. These two categories are equally critical, but no previous research has demonstrated whether the ways in which these two kinds of knowledge are transferred are also different. The second way for subsidiaries to build a system/base of knowledge is to develop relevant knowledge pertaining to the host market by themselves. Although this may take much time, the end result may better correspond to the local needs, and might, at the same time, reduce the number of potential problems which can occur in the transfer process. Marketing Knowledge Marketing knowledge is the know-how required when marketing activities are executed, and includes marketing research, channel operation, promotion, product design, and marketing information systems, and so on. In that marketing knowledge is one of the most important ownership advantages of MNCs entering foreign markets, many of the MNCs which become market leaders are those which develop excellent marketing capabilities. Marketing knowledge is different from technological knowledge which narrowly focuses on product research and development, inner design and manufacturing. Given its characteristics of continuousness, technological knowledge can usually be documented, codified and easily transmitted; to be sure, new technological developments usually are rigorously based on technologies previously developed. But marketing knowledge is a different story since it sometimes evolves from long-term experiences and trial-and-error, all the while cultivating tremendous insight into target markets, consumer behavior, and competitors. Furthermore, it can formulate the future vision of the marketing principles of an industry, with some knowledge perhaps changing the usual rules of competition by jumping across the common senses, a practice which can be traced back to strategic intent, as proposed by Hamel and Prahalad (1994). Knowledge Transfer Modes in MNCs Based on researchers earlier efforts((bartlett & Sumantra, 1989; Sumantra & Nohria, 1993; Lyles and Salk, 1996; Yip, 1995 ;Gupta & Govindarajan, 2000a,2000b), here we develop a matrix which classifies the ways of knowledge transfer into four modes, as shown in Table 1. They are the global knowledge mode, standardized knowledge transfer mode, host country knowledge development mode and the hybrid mode. With a high level of global integration and a low level of host country response, MNCs pursue globally appropriate knowledge which can be applied to global markets, without having to make changes in response to/ local demands; in this manner, transfer efficiency and consistency of operating globally are considerably enhanced. Simply put, the global marketing knowledge developed by an MNCs is transmitted to its subsidiaries. Secondly, with a low level of global integration and a high level of host country response, knowledge is developed on the basis of the realities of the local market. This mode, however, necessitates that knowledge be fully in line with customers needs and that knowledge interactions and transfer activities between subsidiaries be at a minimum and not be frequent. Thirdly with a low level of global integration and a low level of host country response, the parent of an MNC plays an important role in transferring its standard knowledge which is developed in the home country. In the parent s transmitting the knowledge to its subsidiaries, however, the interactions of knowledge among the subsidiaries still do not flourish because of the subsidiaries mutual independence. The fourth mode of knowledge transfer, the hybrid mode, is high on the two dimensions and it is contingent on the intents and needs of the MNC and on environmental pressures. Hence, it corresponds strikingly to a contingent mode, and it is necessary for an MNC in this mode to develop a coordination process to cope with any conflicts that may occur. Th e J o u r n a l o f Am e r ica n Aca d e m y o f Bu s in e ss, Ca m b r id ge * Vo l. 8 * Nu m. 2 * M a r ch 2 0 0 6 121
Extent of global integration Table 1. Modes of Knowledge Transfer of MNCs Extent of host country response Low high high Global knowledge mode Hybrid mode low Standardized knowledge transfer mode Host country knowledge development mode HYPOTHESES DEVELOPMENT Global strategies of MNCs and Knowledge Transfer Though a great deal of literature has been devoted to perspectives about global strategies (Bartlett & Shumantra, 1989; Yip, 1995), by and large, two types of MNC global strategies are commonly recognized and cited. The first is the global integration strategy, and MNCs adopting this strategy are inclined to centralize the decisionmaking processes of their subsidiaries. Accordingly, while coordinating all of their activities, like production, distribution, and logistics between/among their subsidiaries, the parents make most of the decisions and the roles of the subsidiaries are to implement those decisions. The objective of the globally integrated strategy is to pursue the global efficiency and reduce the costs of the whole MNCs. MNCs which follow the multidomestic response strategy emphasize the local response, assuming that the marketing knowledge developed from the home country can not be completely transferred to a subsidiary in a foreign country. For this reason, the parent authorizes the subsidiary to establish its own marketing knowledge system which is embedded in the context and social system of the host country. Thus few marketing knowledge transfer activities between the parents and their subsidiaries take place. According to Gupta & Govindarajan(1991; 2000a), knowledge transfer and distribution are highly related to the strategies of MNCs. Hamilton & Kashlak(1999) pointed out that the marketing activities of the MNCs in the host country are influenced by the control intentions of the MNCs. This perspective can be traced back to Dunning s eclectic theory which views the entry mode decision as a function of the degree of control of MNCs over their subsidiaries. The inflow of technology and knowledge from the parent to the subsidiary is decided by the level of control. Thus, the higher the level of control, the more inflow of knowledge there is, and vice versa. When MNCs select the global integration strategy as their main competitive philosophy, they likely gain increased global efficiency by integrating their global resources and heightening level of control over their subsidiaries. In so doing, stemming from the fact that the parents knowledge and technologies are the main sources of core competitiveness, subsidiaries around the world are interconnected, thereby leading to the formation of an integrated network. Similarly, marketing knowledge is also transferred to the subsidiaries from the parents which have established their global knowledge system. In other words, the parents marketing knowledge becomes the subsidiaries core resources which they use to manage local markets as a subunit of the greater world market. Based on the conceptual development above, we then make the following hypotheses: H1: The more accepting MNCs are of the multidomestic response strategy as their global strategy, the more likely it is that their subsidiaries in Taiwan will adopt the host country knowledge development mode to develop their marketing knowledge. H2: The more accepting MNCs are of the global integration strategy as their global strategy, the more likely it is that their subsidiaries in Taiwan will adopt the global knowledge mode to develop their marketing knowledge. Market Factors MNCs enter foreign markets to gain extra benefits and/or to exhaust production capacities. Obviously, the larger the foreign market is, the more intensively MNCs have to compete. However, entering a foreign market can incur some risks because of significant differences in consumer preferences, in the legal and political environments, and in socio-cultural factors (Hamel & Prahalad, 1994). Based on theories of foreign investment (Dunning, 1988), MNCs are more likely to choose a low risk entry mode when they sense larger differences with regard to cultural distance and market demands between the host country and home country. When entering a host country which resembles other foreign markets they have entered before, MNCs are more inclined to directly transfer their global marketing knowledge or standardized marketing knowledge to the subsidiaries because it requires lower costs and is more efficient. Thus, we hypothesize: H3: The more similar the Taiwan market is to other foreign markets that MNCs operate in, the more likely their subsidiaries in Taiwan will adopt (1) the global knowledge mode or (2) the standardized knowledge mode. Not all foreign markets are deemed of equal importance to MNCs which are considering international expansion and specialization (Hamel & Prahalad, 1994; Yip, 1995). Some countries are especially significant; Japan, Th e J o u r n a l o f Am e r ica n Aca d e m y o f Bu s in e ss, Ca m b r id ge * Vo l. 8 * Nu m. 2 * M a r ch 2 0 0 6 122
for example, is a very important Asian market for many MNCs in that it is often referred to as the gateway to Asia and it can serve as a test market for consumer products before they are launched in other Asian markets; this aside, it also represents a strategic position in the global market of MNCs. Scholars have argued that some countries are good leading indices of a firm s ability to enter the markets of other countries(yip, 1995; Gupta & Govindarajan, 2000b, or for a firm to make the claim that its brand is a global one. If one particular country can be important in the global strategies of an MNC, then its subsidiaries in that country should follow the global operation policies of that MNC to achieve the strategic objectives of its parent. In light of this, the knowledge transfer mode of the subsidiaries in that country expected be the global knowledge mode since the parent will be more apt to keep serious control over the subsidiaries in that country for the purpose of achieving its global goals. Hence, we hypothesize: H4: The more importance an MNC places on the Taiwan market, the more likely it is that the Taiwan subsidiary will adopt the global knowledge mode. Market uncertainties encompass the main risks MNCs must face when venturing into foreign markets. These may come from instability with regard to market demand or intensive competition. Such uncertainties can worsen the competitive positions of MNCs which are not familiar with the foreign market. Under this situation, they encounter serious challenges and the standardized marketing knowledge the parents offer might very well not match the local needs, and require that, for speed and efficiency, the subsidiaries make decisions independently based on the temporary situations to respond to the local environment. In this way, the subsidiaries gradually develop their own operation knowledge, and this knowledge is market-tested through trial-and-error. In the meantime, the marketing knowledge outside the host country may not match that of the local environment. Thus, we propose the following hypothesis: H5: The greater the uncertainties of the Taiwan market are, the more likely it is that the subsidiaries will adopt the host country knowledge development mode. The overall conceptual framework can be summarized, as shown in Figure 1. There the nine hypotheses proposed above are incorporated and the causal relationships between the predicted variables and the dependent variables are indicated. Global Strategies of MNCs 1. Global integration strategy 2. Multidomestic response strategy Market Factors 1. Market similarities 2. Market importance 3. Uncertainties Modes of Knowledge Transfer of MNCs 1. Global knowledge mode 2. Standardized knowledge transfer mode 3. Host country knowledge development mode Figure 1. Conceptual Framework METHODOLOGY Measures The subject of Modes of Knowledge Transfer of MNCs has received little attention in previous research largely on account of its innovativeness. Even in papers regarding knowledge management and knowledge transfer, although many have given attention to technology transfer as opposed to intangible knowledge transfer (Cohen & Levinthal, 1990), technology is not the same as knowledge. The core competitiveness of a corporation consists of resources and capabilities, the former being product or process technologies, and the latter capabilities pertaining to business operations. This research explores four academic fields for proposing our measures: (1) technological transfers (Teece, 1986; Howells, 1996); (2)multinational corporation operations(dunning, 1988; Bartlett and Ghoshal, 1989; Yip, 1995; Conn and Yip(1997); (3) international marketing(dunning, 1998; Dunning & Sangeeta, 1997; Laroche,Kirpalani and Zhou, 2001); and (4) knowledge management(kogut and Zander, 1993; Bresman, Birkinshaw and Nobel, 1999; Gupta and Govindarajan, 1991; 2000a; 2000b). Global Strategy is a topic frequently discussed in the fields of international business, and numerous classifications have been proposed because of Th e J o u r n a l o f Am e r ica n Aca d e m y o f Bu s in e ss, Ca m b r id ge * Vo l. 8 * Nu m. 2 * M a r ch 2 0 0 6 123
differing points of view. Our research follows the perspective put forth by Bartlett and Ghoshal(1989) and Yip(1995), classifying global strategies into three types. Market Factors is a term used here to refer to the specific attributes of the Taiwan market that will influence the transfer modes of marketing knowledge that the parents adopt. In this study, relevant factors about the entry mode of the MNCs were selected and revised from past research about entry mode of MNCs. SAMPLE The population for this study consisted of large and medium sized multinational corporations that had established subsidiaries in Taiwan. In compiling the sample, the selection criteria used were as follows: (1) MNCs that invested in Taiwan through direct investment or in joint ventures with local firms. (2)Consumer product industries or services. The sample were drawn out from the foreign investment database established by the Investment Commission of the Ministry of Economic Affairs of Taiwan, 2003. A sample of 421 private foreign investment firms (including joint venture cases) were selected. The questionnaires were mailed to the managers of the firms who were either general managers or international department managers. A total of 352 questionnaires were sent out, and 75 were received within three weeks. Follow-up questionnaires were sent to non-respondents after two weeks and again 31 completely answered questionnaires were returned after six weeks. In all, the initial and follow-up mailings yielded 106 responses from the primary respondents for a response rate of 30.1% percent. Respondents did not differ significantly from non-respondents in terms of firm size or industry. Consumer product manufacturers occupied the highest percentage (20.7%), and retailing the second (18.9%). The sightseeing and food industries were also high compared with other industries; this fact shows that these two industries are popular investment directions in Taiwan. Two primary statistical methods were applied. First, factor analysis was used to retrench the number of variables and extract the potential factors. Second, the stepwise multinomial logit model was employed to determine the predictability of the independent variables to the dependent variables. RESULTS For the purpose of examining their overall effects on the different modes, all of the independent variables are presented in the Full Model, shown in Table 2. The first two independent variables, the multidomestic response strategy and global integrated strategy, are both significant in Models 2 and 3. This obviously indicates that global strategy is an important indicator of the knowledge transfer mode, so Hypotheses 1 and 2 are all fully supported. As for the market factors, market similarities and market importance are also significant in the analysis of Models 1,2 and 3, but the effects of uncertainties are not significant in any of the models, which suggests that this may be attributed to the low degree of uncertainties of the Taiwan market. In Taiwan, segmentation of the Taiwan market is significantly less than in the American or Japanese markets, and in fact, it often follows their steps in the development of a product. This strongly implies that the Taiwan market might be viewed as highly predictable by the MNCs in this study. It can be concluded that only some market factors are real determinants in selecting the knowledge transfer mode. Whereas Hypotheses 3 and 4 are supported, Hypothesis 5 is not supported. Table 2. Multinomial Logit Analysis of the Marketing Knowledge Transfer Modes Full Model Model 1 Model 2 Model 3 Standardized knowledge transfer mode (1) v.s. Host country knowledge development mode (0) Global knowledge mode (1) v.s. Host country knowledge development mode (0) Standardized knowledge transfer mode + Global knowledge mode (1) v.s. Host country knowledge development mode (0) d p dx d p dx p dx d Global integration strategy 0.23 0.30-1.15-1.26*** -0.74-0.87** Multidomestic response strategy 0.24 0.31 0.84 0.92** 0.46 0.53* Market similarities 0.49 0.60* 0.43 0.48* 0.53 0.59* Market importance 0.48 0.58* 0.85 0.98** 0.41 0.46* Uncertainties 0.18 0.29 0.03 0.05 0.06 0.08 2 =105.44*** 2 =89.33*** Note: 1. * denotes p<0.05; ** denotes p<0.01; and *** denotes p<0.001. 2. is the standardized coefficient estimated, and d p dx is the marginal effects of independent variable on dependent variable. Th e J o u r n a l o f Am e r ica n Aca d e m y o f Bu s in e ss, Ca m b r id ge * Vo l. 8 * Nu m. 2 * M a r ch 2 0 0 6 124
CONCLUSIONS Thorough investigations of the fields of knowledge management have recently helped to clarify the multi facets of international expansion behavior of MNCs (Gupta & Govindarajan, 1991). From the perspective of knowledge management, an MNC can be regarded as an organization for the development and transmission of international knowledge, while the process of international market expansion can be regarded as the management process of replicating and transferring the international knowledge of an MNC. If MNCs successfully absorb, comprehend and transmit the knowledge pertaining to the economic and socio-cultural environment of the host country, then they can smoothly establish channels of communication between their products and the needs of the local market. The products or services MNCs offer in fact are to sell the knowledge assets of the MNCs (Grant, 1996). This perspective is growingly important in explaining the internationalization process of MNCs relative to traditional international business theories. On account of the importance of home country knowledge transfers of MNCs in international expansion, it should be noted that knowledge transferring behavior must be highly connected with the competitive strategies of MNCs. This research demonstrates that global strategies should not be ignored in the process of international marketing knowledge transfer. Our findings indicate that the global strategies that MNCs adopt may mostly explain the transfer mode; besides this, the market characteristics and the characteristics of marketing knowledge are also significant. Future Research can focus on the evaluation of the performance of transfers which should be considered for constructing the conceptual model completely. The directions of transfer are also important for knowledge management. 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